What’s your strategy for making the most from the flood of off-lease vehicles flowing into your dealership?

Perhaps not so much a flood as a trickle, believes industry consultant Tommy Gibbs. Either way, he advises dealers to sharpen their processes and practices to weather whatever change to the business foretells.

This year marked the greatest supply of used cars since 2008, J.D. Power has reported, due primarily to “dramatic increases in off-lease maturities.” Most are three-year-old models. The data company also noted this is a flood of 800,000 off-lease models.

Edmunds.com pointed out that CPO sales were up 11 percent in 2013, up 20 percent through 2016. The company’s most recent Used Vehicle Market Report shows that CPO is tracking at about 22.6 percent of all franchise used car sales in 2016.

This volume will give consumers variety, though depreciation will erode prices, from 14 percent last year to a 17.6-percent decline this year. Given this pricing pressure, what can you do to recondition and merchandise these vehicles well to reduce costs and turn them faster? This article offers practical suggestions.

Gibbs, though, isn’t convinced and says dealers might want to temper their expectations too.

“Even if the off-lease volume is what some believe, it shouldn’t be a big deal for dealers who pay attention and have in place suitable processes,” he says. “If the dealer has his or her business model down these cars should be just another deal to be addressed the way car dealers always do.”

Gibbs says dealers should use caution when inventorying and marketing CPO vehicles, in whatever volume they handle.

“Dealers get jacked up about CPO, and they’ll start certifying everything and get overstocked,” Gibbs says. “Stocking too many models at similar price points gets dealers in trouble.

“Service runs hard after these cars and is in danger of over-conditioning them. Management has to control that enthusiasm. Otherwise, the dealer ends up putting too much into these cars through reconditioning.”

Reconditioning

However you acquire CPO-level inventory, you will, at a minimum, run them through detailing to give them that new car look and smell. To meet OEM certification specifications, though, these units must be inspected to their standards, and worn parts replaced or repaired.

Keep an eye on at least two costs here:  how fast your reconditioning processes move vehicles from intake to the frontline, which contributes to holding costs on each unit that erodes gross, and the costs you put into these cars; the danger is over-reconditioning them.

When I talked to Jared Ricart, fixed operations director for Ricart Automotive Group, recently, he was very concise about used-car management: “Used cars are a melting block of ice,” he told me. “You have to get them to the front line and sold as fast as you can, and smart reconditioning is critical to speedy time to market.”

Dennis McGinn is chief executive officer for Rapid Recon, a time-to-market workflow software company. Dealers like Ricart use the tool to get cars through recon faster, in three to five days. Faster time to market reduces holding costs that erode margin for each day a car is not frontline ready.

“By getting CPO inventory retail-ready faster, holding costs do not erode margin as much, and because they hit retail faster turn increases, all contributing to healthier CPO sales and margins,” McGinn notes.

“Furthermore, accountability tools built into recon software can help the used-car, service, and recon managers set controls so CPO inventory is not over-reconditioned,” he said. 

Another challenge, Gibbs points out, is service’s desire to charge retail parts and labor to the used car department. “The dealer has to take control of that behavior,” he says, “and must look at every dollar spent through recon. Otherwise, CPO pricing will compete with the new car business even more than it does already. I understand we’re in the retail business and want to charge full retail back there, but in this very competitive market it’s getting increasingly tougher to sell cars against other business models like CarMax, Beepi, and Carvana.”

One option for keeping recon costs lower is to use OEM-approved second-tier replacement parts, reminds Anthony Greenhalgh, former collision and recon center manager for the Jerry Seiner Dealerships in Utah and now a process performance manager for Rapid Recon. 

“Some OEM manufactures provide good-better-best parts options to compete with the aftermarket on service lane parts such as brake pads, filters, wiper blades, and batteries,” Greenhalgh notes. “Check your CPO certification standards, and I believe you’ll be pleasantly surprised to learn that there are economic friendly alternatives to production line parts within the OEM platform.” 

Merchandising

CPO and regular used shouldn’t be mixed. “To be successful in this evolving CPO market, we encourage dealers to adopt new tactics for merchandising CPO vehicles,” says Richard Ashworth, president of Wheel’s Auto, an auto dealership signage and merchandising company in Niagara Falls, N.Y.

“CPO inventory is not simply used cars,” Ashworth notes, “so dealers who use the right visual cues, attention-getters, and marketing products create this crucial and vital distinction in buyers’ minds. Active CPO merchandising is much more than lipstick.” 

Gibbs agrees. He advises every dealer to place a CPO unit in the showroom and cover its sheet metal with magnetic signs that describe the features, benefits and value proposition of CPO inventory. The signs are a self-guided CPO lesson for browsing shoppers and well massaged talking points for sales associates to use with customers.

Gibbs points out that CPO signage should distinguish the dealer’s CPO franchise from the remainder of the used inventory. Several OEMs require their dealers use branded CPO-differentiated signage, point-of-sale displays, banners and windshield stickers. Their contracts with Wheels enable dealers of these OEMs to order CPO merchandising materials directly.

“You want them to stand out,” Gibbs points out.

Whether the off-lease CPO tsunami hits your dealership or not, do you have a strategy for making the most from the CPO inventory you offer your market? Two operations that can affect CPO outcomes the most are how you control their reconditioning — expense and time-to-market — and how they are merchandised.

“Look hard at every dollar you spending on those CPO cars,” Gibbs says, “and look carefully at how to take cost out of them; otherwise, how you have to price them will be competing with your new-car business even more tightly.”

Jim Leman has been writing about automotive retail operations since 1992. You can reach him at jimleman@gmail.com.